Investeens

At first, the idea seemed inconceivable. But now, prominent politicians Jeb Bush (former Florida governor) and Newt Gingrich (former Speaker of the House) are proposing that the Congress add a new section to the bankruptcy law which will allow states to declare bankruptcy if they are big financial trouble. They point out that this option is already available for all cities and towns in America, but not for states.

Why are so many states in so much trouble? They have been promising for decades to pay their unionized workers a fair wage each year and then an annual pension after they retire. What to many was a fair wage twenty-something years ago has started to look awfully generous today because union contracts included a provision that worker pay would go up an average of 3% each year. This was called a "cost of living" increase because the inflation rate (the rate at which the prices of goods and services go up) was about the same. It wasn't unreasonable to increase state workers' pay so that it kept pace with inflation.

But, over time, 3% pay increases add up. What was a $50,000 per year job 23 years ago, at a 3% increase per year, would be a $100,000 job today. The states didn't do the math very well when they made these promises. Mr. Bush and Mr. Gingrich point out that California alone will be paying over 12,000 retired employees over $100,000 per year. Without addressing whether this is fair compensation for state workers based on the jobs they performed for the state and how long they worked, the bottom line is that California and other states that made generous promises may simply be unable to pay.

How would bankruptcy help? It is essentially a do-over or reset button. It would allow a state to break its contracts and promises and then renegotiate with the union to agree on worker pay and benefit levels that it could afford. Bankruptcy has been used in this way by corporations and cities many times in the past. How do you come down on this issue? Is a promise a promise, as union workers argue, or should states, in these difficult times, be able to throw out obligations that they say they cannot meet?

See Better off bankrupt